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What is the Negative Volume Index

21 Sep 2023

What is the Negative Volume Index or NVI?

The Negative Volume Index (NVI) is a technical indicator used in financial analysis, particularly in the field of stock market analysis. It was developed by Paul Dysart in the 1930s as a way to identify and measure bearish sentiment in the market.

What does NVI indicate?

NVI is based on the concept that when a stock experiences a surge in trading volume alongside a price increase, it suggests a robust demand for the stock with buyers actively acquiring it, hinting at the potential for a bullish trend. Conversely, when a stock registers substantial trading volume while its price is declining, it signifies that investors are offloading the stock, signaling the possibility of a bearish trend.

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The Negative Volume Index (NVI) is often associated with the concept of "smart money" in the context of stock market analysis. Smart money refers to large institutional investors, such as mutual funds, hedge funds, pension funds, and other professional investors. These entities often have access to significant resources and information, allowing them to make well-informed investment decisions. As a result, their trading activities can have a considerable impact on the market.

The idea is that the NVI can be used as a tool to identify the actions of smart money or institutional investors in the market.

Calculation of Negative Volume Index 

Start with an initial value, often set at 1,000.

For each trading day, if the volume on that day is lower than the volume on the previous day, the NVI remains unchanged.

On the other hand, if the volume on that day is higher than the volume on the previous day, the NVI is adjusted as follows:

NVI = NVI - [(NVI / Previous NVI) * {1 - (Close Price / Previous Close Price)}]

The NVI will typically trend downwards during periods of declining volume and rising prices, reflecting the negative sentiment and potential bearish trend. Conversely, during periods of rising volume and falling prices, the NVI may remain stable or even increase, reflecting a more positive sentiment and potential bullish trend.

Limitations of NVI

The Negative Volume Index (NVI) has limitations that traders and analysts should consider. Firstly, NVI's reliance on historical data can lead to delayed signals, hindering timely decision-making. Interpretation is subjective, making it prone to differing opinions. The indicator may produce false signals, especially in low-volume or sideways markets. NVI places significant emphasis on trading volume, which might not always accurately reflect market sentiment. It doesn't incorporate fundamental factors or consider different market types, limiting its versatility. Furthermore, NVI's complexity in calculation requires specialized tools. Lastly, while it offers insights into sentiment, it lacks predictive solid power, necessitating complementary analysis methods for robust trading strategies.

 

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